chapter 9 - price determination Flashcards
(25 cards)
What is price determination?
The process by which the interaction of demand and supply sets the market price and quantity of a good
What is equilibrium price?
The price at which quantity demanded equals quantity supplied
What is equilibrium quantity?
The quantity bought and sold at the equilibrium price
What happens when the market is in equilibrium?
There is no shortage or surplus, and the market clears
What is excess demand?
When quantity demanded is greater than quantity supplied at a given price
What is market equilibrium?
The point where quantity demanded equals quantity supplied
What happens if the market price is below equilibrium?
There is excess demand, causing upward pressure on the price
What is excess supply?
When quantity supplied is greater than quantity demanded at a given price
How does an increase in demand affect equilibrium?
It raises both the equilibrium price and quantity
How does a decrease in demand affect equilibrium?
It lowers both the equilibrium price and quantity
How does an increase in supply affect equilibrium?
It lowers the equilibrium price but raises the equilibrium quantity
How does a decrease in supply affect equilibrium?
It raises the equilibrium price but lowers equilibrium quantity
What is a market?
Any place where buyers and sellers interact to exchange goods or services
What is the role of price in a market economy?
To allocate scarce resources efficiently
What is the price mechanism?
The system where prices rise and fall due to changes in demand and supply
What signals does the price mechanism send to producers?
High prices signal producers to supply more, low prices signal them to supply less
What signals does the price mechanism send to consumers?
High prices discourage consumption, low prices encourage it
What is rationing in economics?
Limiting the supply of a good when it is scarce, often using price
What is an incentive function of price?
Price motivates producers and consumers to change behaviour
What is the signaling function of price?
Prices signal information to market participants
What causes a movement along the demand curve?
A change in the price of the good or service
What causes a shift in the demand curve?
Changes in non-price factors like income, tastes, or prices of related goods
What causes a movement along the supply curve?
A change in the price of the good or service
What causes a shift in the supply curve?
Changes in non-price factors like technology, production costs, or taxes
